Laying To Rest An Economic Mainstay

Even Though Employment Rates Are High,inflation Refuses To Rise From The Dead

June 7, 1998|By Tamara Lytle, OF THE SENTINEL WASHINGTON BUREAU

WASHINGTON - As the U.S. economy waltzes through one of its best periods in history, one of the biggest surprises is that inflation hasn't crashed the party.

With historic levels of economic growth and with unemployment lower than it has been since 1970, the usual pattern would mean serious inflation. Even the economic experts are scratching their heads about why it's a no-show.

Stephen S. Roach, chief economist for Morgan Stanley Dean Witter, summed up the befuddlement of economists in a memo to clients recently.

``These are the times that test the souls of mere mortals, to say nothing of economists,'' Roach wrote. ``Once again, it boils down to a battle of paradigms - whether inflation can, indeed, remain quiescent as economic growth surprises decisively on the upside for a third year in a row. All my training and all my models suggest that, while the U.S. economy is very different in the 1990s, the macro rules haven't changed. We'll know soon enough. In the meantime, what I wouldn't give for a good night's sleep.''

While Roach and economists may be having trouble sleeping, that's not the case for most Americans, who are enjoying one of the best economic times in history.

Unemployment rates are low - 4.3 percent in May. Usually that would be an invitation to inflation, which erodes the value of assets - everything from housing values to the purchasing power of the greenback.

But in the past year, inflation ran at just more than 1 percent - a far cry from the double-digit levels of the 1970s and early 1980s.

Meanwhile, economists are busy reworking their figures, trying to account for a new climate where low unemployment and little or no inflation can mingle harmlessesly.

``Inflation died and went to heaven,'' said David Wyss, chief economist for Standard & Poor's DRI. ``It's been a long time since we've seen anything like this.''

The lack of inflation means people can afford to buy more, jobs are available, stock values are up and housing is more affordable. It means businesses don't have to figure out how to stock up on raw materials to protect themselves from price increases and retirees don't have to worry about seeing their fixed incomes wither.

The current economic expansion - it's been 87 months since the last recession - could come crashing to a close if inflation reappears. But economists think current conditions will stick around at least long enough - six more months - to become the second-longest expansion in U.S. history. Household wealth is already the highest since estimates were first made in the 1950s.

``If we don't out-dumb ourselves, you very well are standing in the middle of history,'' said David F. Scott, financial economist and professor at the University of Central Florida.

Economists are adjusting their figures on just how low unemployment can go without setting off inflation. Usually, fewer unemployed workers means job-seekers can demand higher wages. That in turn causes companies to hike prices, starting the inflation spiral.

That's not happening - at least not yet. Prices rose just 1.4 percent between March 1997 and March 1998, said Kevin Brickey, an economist with the Florida Department of Labor. The average manufacturing wage in Florida rose 3.6 percent during that time period, so workers could buy more, even when higher prices were factored in.

``That's a real increase in standard of living,'' said Brickey, who is based on Lakeland.

Gerald D. Cohen, senior economist at Merrill Lynch, agreed. That gap, of wages growing faster than inflation, has been around since 1995, Cohen said. The 20 years before that, he said, wages just kept up with inflation.

``Your paycheck may not look that much larger, but when you go out to buy stuff, you can buy more,'' Cohen said.

Cohen said he sees no sign of inflation, even though unemployment rates are low.

In the 1980s, an unemployment rate of 6 percent was enough to set off inflation. In the 1970s, it was 7 percent. For the 1990s, the figure is down below 4.5 percent, Cohen said.

Economists aren't ready to throw out the old textbooks on inflation. They see several events keeping inflation at bay currently.

The first is that workers haven't demanded higher wages, as they usually do when labor is scarce. That's a bit of a holdover from the last recession, when many companies permanently downsized.

``Because of that psychological impact on the American worker, there has been a reluctance to demand higher wages,'' Scott said.

Those fears are starting to fade, and wages have increased some in the past year. But low fringe-benefit costs, especially for health care, have kept the overall price of labor relatively in check for businesses, Wyss said. The stock-market boom also has made many families feel so wealthy they haven't worried as much about demanding raises.

Another check on inflation has been global competition. As trade barriers fall and long-distance business increases, American companies can't just raise prices as they once did.